Summit Midstream Corporation

Welcome to the Q3 2021 Summit Midstream Partners LP Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to your host, Mr. Ross Wong.

Thanks, Operator, and good morning, everyone. If you don't already have a copy of our earnings release that was issued earlier this morning, please visit our website at www.summitmidstream.com, where you'll find it on the homepage, events and presentations section, or quarterly results section. With me today to discuss our third quarter of 2021 financial and operating results is Heath Deneke, our President, Chief Executive Officer, and Chairman, Mark Stratton, our Chief Financial Officer, along with other members of our senior management team. Before we start, I'd like to remind you that our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of future volumes, operating expenses, and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy, and other plans and objectives for future operations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Please see our 2020 annual report on Form 10-K, which was filed with the SEC on March 4th, 2021, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA, and distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliation to the most directly comparable GAAP measures and our most recent earnings release. And with that, I'll turn the call over to Heath.

All right, great. Thank you, Ross, and good morning, everyone. So this morning, Summit reported third quarter financial and operating results of $61.1 million of adjusted EBITDA, which for the third consecutive quarter exceeded our internal expectations. We had 20 new wells connected during the quarter, which includes seven wells in the Barnett and six crude and white wells in the Willison. The seven Barnett wells are the first new wells that have been turned online on our system since 2019. And, look, the well results are really the best that we've seen in the play. We've experienced 30-day IPs in excess of 55 million a day of gas in the aggregate. During the quarter, we also continued to utilize free cash flow to delever the balance sheet and achieved another $37 million of debt pay down in the third quarter, which brings us up to $132 million of debt pay down year-to-date. That enabled us to end the quarter with total leverage ratio of just under 4.9 times EBITDA. So as we look forward to the fourth quarter, we expect to continue building momentum with approximately 45 new wells that are scheduled to turn in line by the end of the year. So given that our financial outperformance to date, together with a steadily improving outlook for the business overall, we now expect full-year 2021 adjusted EBITDA guidance to be, or EBITDA results to be near the high end of our previously announced guidance range of 225 to $240 million. Additionally, we expect our full year 2021 capital guidance to come in towards the low end of the range, which was $20 to $35 million of guidance range. Subsequent to quarter end, we've made significant progress advancing our two top priorities for the year, which included refinancing our billion dollars of debt that was maturing in 2022, as well as furthering the development of the EE pipeline. As noted in our earnings release, we've made significant progress on each of these and I'd like to spend some time and provide some additional details. So first, turning to the refinancing, on Tuesday we announced the closing of our new four and a half year $400 million ABL Revolver and a new $700 million second lien secured notes. The closing of these credit facilities really marks a turning point for Summit, and it's certainly a culmination of two years of effort to really transform the balance sheet and position for this refinancing. Since the end of 2019, we've employed a strategy centered around maximizing free cash flow and a prioritized debt repayment. With the new credit facilities, we further demonstrated this commitment to improving the balance sheet. We've structured the A-bill revolver and the second lien notes in a way that really enables us to allocate up to $300 million of excess free cash flow, which is effectively cash generated from operations less capital expenditures, that we can apply towards repaying our higher cost second lien debt. This structure reflects our commitment to focus on delivering the balance sheet by targeting absolute debt reduction as well as growing our underlying EBITDA, which are really the top priorities that we're going to be focusing on going forward. And together, we think this focus will enable us to continue unlocking value up and down the entire capital structure. The ABL Revolver is also more covenant light compared to our recently retired cash flow-based revolver. And it provides us with not only ample liquidity, but also additional flexibility to continue to execute on our balance sheet transformation while also providing an avenue to pursue value-added growth opportunities. With the net proceeds of the new credit facilities, we were able to extinguish the $725 million balance on the revolver, which was scheduled to mature in May of 2022, as well as the $234 million principal balance of the 2022 notes, which was scheduled to mature in August of 2022. So effectively, this holistic refinancing solution eliminates our near-term refinancing risk, It creates a three-and-a-half-year runway, if you will, until our next scheduled debt maturity and provides substantial covenant flexibility really to manage any kind of unexpected delays or downturn of development activities around our system. Turning now to EE, our other top priority, construction of EE continues to progress very well. We were able to achieve mechanical completion of the pipeline in October of 2021. And we expect to be able to place the project in service during the fourth quarter of this year and potentially as early as by the end of November. And now that we're nearing the end of construction, we are pleased to announce further reductions that we're able to achieve on the project budget, which is expected to be approximately $400 million in total which is roughly $280 million net to Summit for its 70% interest in the project. As a reminder, EE has a BCF a day under contract, or approximately 75% of its initial 1.35 BCF a day of total throughput capacity. These are committed commitments, long-term commitments, take-or-pay style commitments from some of the largest and most active producers in the Delaware Basin, including Exxon and Marathon Oil. Upon commissioning, EE will begin service under the first annual contract period at roughly $600 million a day of FT commitments, and those will step up throughout the first three years of service, such that by year four, EE will earn take-or-pay revenue on the full one BCF a day of contracts currently in hand. Furthermore, as activity levels and production in northern Delaware continue to build momentum with an improving commodity price outlook, We do expect to be able to fill the remaining $350 million a day of available firm capacity over the next several years. Upon initial service, we expect EE to – well, EE will be connected with five natural gas processing plants in the northern Delaware Basin. It is also interconnected with two of the largest and newest downstream pipelines originating in the Oahu region. which will provide EE's customer with very desired access to growing LNG export markets in the Gulf Coast region. Beginning in year four following startup and assuming that EE is fully subscribed at current market rates, we would expect EE to generate approximately $45 million of EBITDA, and that would be net to summit 70% interest in the assets. which on a net age basis represents really a bill multiple of around 6.25 times. Look, relative to trading multiples of other long-haul pipes of this like, we expect EE will contribute significant residual equity value to SMLP. Additionally, to the extent future demand exceeds the initial 1.35 BCF per day of capacity, The EE system has the ability to expand its capacity to approximately two BCF a day on a very cost-effective basis, simply just with the installation of midpoint compression. Of course, this would dramatically increase or improve the bill multiple as well if we were able to achieve that two BCF of subscription with the incremental cost associated with that expansion. And so, look, obviously we're very excited to be able to not only announce that we're weeks away from being able to put the pipeline in service, that we've made additional gains on the capital budget, reducing it by more than $100 million from the original FID, and just very excited about being able to commence operations. And we certainly look forward to the prospect of continuing to grow our customer base and our subscription levels in the coming years. as we continue to see the Northern Delaware Basin ramp up. So with that, I'd like to hand the call over to Mark, and he'll go through our detailed financial segment results.

Great. Thanks, Heath, and good morning, everyone. I'm going to begin with a discussion of our quarterly financial performance around the segments that comprise our core focus areas. Starting with the Utica Shale, the SMU system averaged 396 million cubic feet a day in the third quarter. and segment-adjusted EBITDA totaled $8.3 million, which was down by $2.3 million or 22% from the second quarter of 2021. The variance here was largely due to natural declines of production from wells on the system, including the four-well pad that was connected in March of 2021, which averaged just over 104 million cubic feet a day during the third quarter. We did have two new wells connected behind the TPL-7 interconnect during the quarter, and as of September 30th, our Utica customers had 10 ducts, including another four-well pad that is expected to be turned in line later this month. For our Ohio gathering segment, adjusted EBITDA totaled $6.7 million for the third quarter, which was approximately 2% lower than the second quarter. primarily as a result of a 2% decline in volumes across that system. Four new wells were connected behind OGC during the quarter, and we currently have nine ducts awaiting completion behind that system. Williston segment adjusted EBITDA totaled $11.3 million in the third quarter, a 17.1% increase from the second quarter, primarily as a result of a more favorable customer volume mix together with increased margins on POP contracts and lower operating expenses. Six wells were connected behind our liquid system in the third quarter of 2021, providing incremental volumes on that system. We do have notably approximately 30 Williston wells behind our liquids focus system that are all expected to be turned in line really by the end of the first quarter of 2022. Just to note, this compares to eight wells connected year-to-date through September 30 of this year. Turning to the DJ segment, adjusted EBITDA here totaled $7.4 million in the third quarter, a $2.3 million increase from the second quarter of 2021, largely due to a $1.8 million benefit related to the settlement of a legal matter with a vendor during the quarter. Third quarter volume in the DJ averaged 23 million cubic feet a day, which was in line with the prior quarter volume throughput. We did have one new well connected to the system during the third quarter, and as of September 30th, we had no ducts behind the DJ system. However, we are currently in discussions with a third party to increase volumes and system utilization through a long-term offload agreement. And now for the last of our core focus areas, the Permian Basin segment adjusted EBITDA totaled approximately $600,000 in the third quarter, a slight increase relative to the second quarter, primarily due to improved product sales margins and a change in customer volume mix. Although there were no new wells connected during the third quarter, we did recently sign multiple new commercial agreements in this segment, including a new gathering agreement with a new customer who is planning to turn in line four new wells in the fourth quarter of this year, and then a separate agreement with a third party who is expected to offload up to 7.5 million cubic feet a day onto our Permian system over the course of the fourth quarter and into the first quarter of 2022. Obviously, with these volume catalysts, we expect to see our processing utilization improved and cash flows to be driven higher going forward. Our legacy areas, which include the Piance, Barnett, and Marcellus segments, generated $33 million of free cash flow in the third quarter. That's really based on $34.2 million of segment-adjusted EBITDA in the aggregate from those segments, and then an aggregate $1.2 million of CapEx for the quarter. As Heath mentioned earlier in the Barnett our anchor customer turned seven new wells in line in September which because they were located on an existing pad required virtually no new Summit CapEx in order to gather these volumes so look I'd say these are some of the most productive wells we've ever seen drilled across the Barnett and in the aggregate generated 55 over 55 million cubic feet a day of production representing nearly 25% of all the Barnett volumes gathered in the second quarter of this year. In the peons, one of our larger customers is expected to turn in line nine new wells during the fourth quarter of this year, which would really be the first new well activity behind our peon system since 2018. These wells are located on acreage outside of the area where we collect MVCs. So these wells will generate incremental cash flow for the segment. Further, this same customer is contemplating a multi-year development program on the same acreage, which could result in up to 100 new wells over the next several years. And then finally, on the Marcellus system, based on customer conversations, we are expecting four new Marcellus wells to be turned in line here in the fourth quarter. Now just turning back to the partnership, Summit reported third quarter net income of $7 million, adjusted EBITDA of $61.1 million, and DCF of $45.7 million. Capital expenditures totaled $5.8 million for the third quarter, which was $2.5 million higher than the second quarter of 2021 and included $2.2 million of maintenance capex. The majority of third quarter CapEx was really associated with growth capital to connect new pad sites in our Utica and Williston segments. During the third quarter, Summit funded all of its EE capital calls for its 70% interest in EE with borrowings under the non-recourse credit facilities of Summit Permian Transmission. SMLP expects to have to contribute another approximately $5 million of direct investment in EE this year to wrap up construction. and that is contemplated in our revised guidance to be towards the lower end of our CapEx range for this year. Since we are expecting EE to commence operations later this year, I want to quickly outline EE's cash flows and the unrestricted financing entities in a little more detail. Cash flow generated by EE will be distributed to its partners on a quarterly basis based on each partner's proportionate ownership. The Summit distributions, which will obviously be equal to the 70% interest that Summit has in EE, will be used to service the interest expense and amortize the principal balance of the project finance debt, and to make cash distributions and amortize the principal balance of the subsidiary Series A preferred equity. As you'll recall, we put the subsidiary Series A preferred equity and the project finance debt in place over the past two years to finance our share of the EE construction costs. Effectively, over the next several years, what we're doing is as SMLP is de-levering its balance sheet, the unrestricted subsidiaries that hold the equity interest in EE is doing the same thing, creating a situation where SMLP will have a visible opportunity at some point over the next several years to bring EE back on balance sheet. With respect to SMLP's balance sheet, we had $725 million outstanding under our $1.1 billion revolver at September 30th. And as Heath mentioned, we repaid $37 million of debt outstanding under this revolver during the quarter with free cash flow generation. Subject to covenant limits, our available borrowing capacity at the end of the third quarter totaled $170.5 million. And with cash on hand, we had approximately $176 million in total liquidity as of September 30th. Our total leverage ratio at September 30th was 4.88 times compared to a maximum limit of 5.75 times, and first lien leverage was 2.90 times compared to a maximum limit of 3.5. Proforma for the completion of our 2022 debt maturities refinancing transaction, including the redemption of the 2022 notes, S&LP had approximately $300 million outstanding under its new ABL Revolver and borrowing availability of $76.1 million after accounting for $23.9 million of issued but undrawn letters of credit. The borrowing base on the ABL Revolver totaled approximately $694 million as of September 30th compared to total lender commitments of $400 million. And with that, I'll turn the call back over to Heath for closing remarks.

Thank you, Mark. To recap, obviously, we're very pleased with our third quarter performance, and we are certainly excited to be able to close the refinancing and put the new credit facilities in place. Again, this refinancing of our maturities, 2022 maturities, is really a transformational milestone for the partnership, providing both the financial flood still flexibility and debt maturity profile to run our business effectively while we continue to maximize free cash flow and continue to pay down debt and achieve overall leverage reduction. EE continues to progress well and have been very impressed with the overall project team for their top tier execution really at every step of the project. I'm proud that they've been able to progress the project in a safe and environmentally friendly manner while staying materially below budget and within the expected timeline. And finally, when we look ahead to 2022, it's still way too early to really have a concrete view, but we are encouraged by the strong commodity price backdrop. As we've kind of alluded to, we've signed various new commercial arrangements that we're excited about. And preliminary indications, we're starting to see from customers or We are seeing some near-term increases, if you will, particularly in the Williston, the Permian, and the Utica segments. We have a lot of wood to chop, so we look forward to working with our producer customers between now and early next year to get a little more solidified view on 2022. But as I said, we're encouraged with what we're seeing thus far. We'd like to thank you for your time today. I look forward to continuing to execute on our strategic plan. and look forward to continuing to provide updates in the future. So with that, operator, I'd like to open the call up for questions.

And thank you. We will now begin our question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touch-tone phone. Please stand by while we assemble our queue. We have our first question from Greg Brody with Bank of America. Please begin.

Good morning, guys. Thank you for all the callers. Just a few questions for you here. In some of your businesses, you were able to realize better margins. Can you talk a little bit about what you mentioned, sort of better mix? Can you talk about what's going on there? Have you been able to renegotiate contracts? Is it commodity-driven?

Yeah. Hey, good morning, Greg. This is Mark speaking. When we talk about customer mix, obviously we have a wide array of customers who are already diverse operating footprint. Every one of those contracts have... you know, unique and different gathering contracts, terms, and rates. And so when we talk about more favorable mix, what you should take away from that is, you know, higher customers who have a higher gathering rate representing a larger share of the overall volume.

Right. And then, you know, you touched a little bit on where you're optimistic about activity. Could you go into a little bit more detail there? Are you, you know... What are your customers indicating to you for next year in terms of increased activity?

Yeah, this is Heath. So it's still early on, right? I think what we have observed, and we've talked about it on some prior calls, is we're certainly starting to see some pickup in activity in the first quarter, like in the Bakken in particular. But it's really early to call. I think we're obviously in an $80 crude price environment and $5 to $6 gas price environment. Literally all drilling locations across our system are economic at those prices, right? It's not a matter of drilling economics. I think what we're waiting to see is what do the producer budgets look like, obviously, particularly the public budgets. EMPs have been focused on generating free cash flow and delivering the balance sheet and returning dollars to shareholders. But I think ultimately economics are going to win out. And when you're looking at, particularly in the Bakken, the Permian, the DJ, and Marcel's Utica, it's got to be very difficult to make a decision not to invest there. and put new wells in the ground with that type of commodity outlook. So I think it's not unusual. We typically won't get enough firm development plans from our producers until mid to late in the first quarter. So I think what we're signaling is if you kind of look at how we've trended, we had mid-20 well connects in the third quarter. We've got 45 wells now. scheduled to come along in the fourth quarter, and we've seen just, you know, like in the Bakken, for example, we have more wells showing up in the first quarter already for next year than we had all of this year. So I think the trends, you know, we're feeling pretty good about it, but, you know, we want to let all the producers, you know, get their, you know, their capital budgets, their programs together, and, you know, we look forward to being in a position to, you know, to get some more color on the year. But it probably will be, you know, first quarter probably towards the end of the first quarter before we'll have that data that we feel comfortable releasing.

And what about some of your private operators? Would you expect the same timing? I'm just curious.

Yeah, I would say generally speaking so. I mean, we're having a lot of discussions now, so it's not like we're not getting any information at this point. It's just everything's pretty fluid. And people are still kind of settling into this higher environment. So I would say we would expect the private guys to probably move a little more quickly to putting rigs to work and bringing new wells online than the public, just given the public sentiment around producers generating free cash flow. And the private guys are certainly going to be more just looking at economics and making decisions on that basis. But yeah, I do think that one of the other benefits we talked about is just the diversification of customers that we have. We have not only a wide mix of basins that we're exposed to, but also a good slug of private and public operators behind our system.

Great. And just one more for you. So you've You mentioned double E's come in below budget. Where do you expect the amount drawn on the term loan to be when you complete the transactions? And how do you think about the pick feature of the preferred, whether you pay that and how you allocate the distributions you'll receive from that entity for repaying those two? Go ahead, Mark.

Yeah, hey, Greg. So we do expect to utilize the full amount of that $160 million term loan that we have in place there to fully finance and bring EE in service. We tried to provide a little more detail about how cash flows would work here in our earnings release, but let me just see if I can summarize it here. Cash is going to be distributed from EE to its partners. Obviously, Summit will get its 70% interest. We will use those cash distributions to not only service the interest, but also amortize the principal balance of that $160 million term loan. Residual cash, and there will be residual cash, will then be distributed up to an entity where the subsidiary Series A preferred equity sits, and that cash will then pay the the stated 7% cash distribution on that PREF and residual cash beyond that will be used to amortize down that preferred equity. And so as you think about it, that credit chain, if you will, will be de-levering over the next several years as cash is distributed up from AA.

So it's... I heard your opening comment, and that's really helpful. Just... So once you amortize the terminal, you will not necessarily start a terminal pay down yet. The goal would be to pay down the preferred once you've achieved your amortization.

That's right. Yeah, it's obviously a higher cost piece of capital in that credit chain. So we'll be motivated and incentivized to pay that down. So, look, that's just the mechanics of how it works. I think the key takeaway is that we'll be de-levering that whole credit chain at the same time as we're de-levering the SMOP's recourse credit facilities on its balance sheet, creating a situation where we will have a visible opportunity over the next several years as EE is ramping up to bring it on balance sheet in a very credit-accretive manner. I'd also just add, as you think about that EE situation, asset. It is truly an asset. Every dollar of debt that we pay down, every dollar of subsidiary series A preferred equity that we pay down is another dollar of equity value that accrues to SMLP and its stakeholders. I just find it a little interesting and we kind of scratch our heads just around the value of EE and how that's either included or not included in our current market cap. It would appear that the value of that EE asset is de minimis here, particularly if you think about values, multiples that other long haul regulated pipes have commanded in the market here recently.

I mean, you're pointing out the value disconnect. I appreciate it's a long-term asset. Is it something you would consider divesting? If somebody were to pay you a better... Yeah.

I mean, it's certainly... I mean, look, we're... To the extent we can... I mean, look, our priorities are pretty clear, right? We're looking to, you know, accelerate de-levering... you know, the balance sheet and we're also, you know, we're also kind of focused on top line EBITDA growth. So, but your point, if, you know, if someone comes in and, you know, offered a value that we thought was reflective of the equity value of, you know, the company, we'd certainly take a look at it. But it's not kind of the base case, but it is something that we would obviously entertain that, you know, if the bid were dry and, you know, it's is pretty notable. I mean, when you just look at, you know, the EBITDA and the additional color we provided here, and you do the math on what assets like that are worth, you know, you could look at, you know, double E being just the equity value in double E is probably as much or more than what our market cap is today, right? So what we're really focused on is just looking to make sure that that valuation is understood and illuminated in our unit price and But, yeah, we'd clearly be, you know, we'd look at the economics if there was, you know, a bid that came in the door. But nothing that we're proactively, you know, out looking to do. Our long-term goal or near-to-long-term goal is to get the pipeline fully subscribed, potentially, you know, get the expanded capacity subscribed, and then, you know, eventually kind of rolling that into the balance sheet. And we think that's kind of the base case and what we think will drive that. the most value for some at this time.

Thank you for the time and helpful answers, guys. Appreciate it.

Great. Thank you.

And thank you, sir. And we have no further questions in queue at this time. Ladies and gentlemen, thank you. This concludes our conference call. We thank you for participating. You may now disconnect.